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BIA-Brukerstyrt innovasjonsarena

C4: COVID-19 and Human Capital: Cataclysm and Catalyzer

Alternative title: C4: COVID-19 og humankapital: Kataklysme og katalysator

Awarded: NOK 2.4 mill.

The COVID-19 pandemic has had significant consequences for many Norwegian companies, and thus also for many Norwegian workers. A central question is how Norwegian companies respond to a shock of this type. To what extent do they respond by cutting investments in physical capital, skills, reducing the number of employees (permanently or temporarily), and does the shock increase or decrease innovation? Which firms responded to the crisis by accelerating their digitalization process, and which were less inclined to do so? Findings from the C4 project show that there is a significant correlation between these questions. Some companies appear proactive in the face of the crisis, while others appear more defensive. The latter group are the companies that try to manage the crisis by hunkering down, drawing on reserves and accumulated buffers until the crisis passes. They cut costs and investments, are more trigger-happy with layoffs, are more likely to lay off than furlough employees, and they delay and cut investments in innovation. On the other end, we find companies that are significantly focused on managing the crisis through innovation (in the broad sense). These companies innovate more, invest more, retain their employees more (and choose furloughs over layoffs if they have to reduce their workforce), and invest more in skills and human capital. What determines which group a given company belongs to? There are particularly two prominent characteristics of the proactive group of companies. Both of these are related to the company's attributes heading into the crisis. One is the company's strategy before the crisis. Companies that had a strategy where innovation played a central role are clearly more inclined to belong to the proactive group. Having expertise, systems, and experience with innovation makes it easier to see innovation as a solution to problems faced, makes the company have higher expectations for the long-term value of the innovations made in response to the crisis, and seems to make the companies more optimistic and willing to invest both in people and physical capital. Conversely, companies that have a strategy built around low costs and low prices are most likely to belong to the defensive group. Companies with strategies built around factors like close customer relationships, branding, and reputation appear to be somewhere between these two in terms of proactive/defensive crisis management. The other prominent feature is the extent to which companies had advantages related to organizational flexibility (or agility) before the crisis hit. Companies that had an advantage in reacting quickly to new threats and opportunities before the crisis seem to have benefited greatly from this during the crisis. This trait appears to have a similar effect to having knowledge and experience with innovation. Note that this holds even if we control for the effect of whether the company had an innovation-oriented strategy, so it's not the same feature measured in two different ways. It's also worth noting that although both these features are positively correlated with the degree of digitization, both findings hold even if we control for the degree of digitization. A somewhat surprising finding is that the company's financial position before the crisis (e.g., debt ratio and liquidity) seems to have had a very limited effect on the company's proactiveness or passiveness during the crisis. This differs significantly from findings from previous crises, like the financial crisis. Part of the explanation for this is likely relatively generous public support schemes, especially towards the weakest companies. The COVID-19 crisis also stimulated the digitization of the Norwegian business sector, as digital interaction with customers, suppliers, and between employees within the companies made it easier to maintain activity. The C4 project also looked at which companies accelerated their digitization in response to the crisis the most. One might assume that the pandemic would primarily stimulate digitization in companies that were initially lagging behind their competitors in terms of digitization, since these were missing out on the benefits from being digital during the crisis. We find the opposite. The most digitized companies were the ones that responded to the crisis with further digitization measures. Thus, COVID-19 increased the differences between companies in terms of digitization. Digital leaders pulled further away from digital laggards in each industry.

The main objectives of the C4-Project were: (i) to inform firms and relevant government agencies on the impact of the COVID-19 crisis on human capital decisions, and the short and long-term economic and labor market consequence this entails; and (ii) to move the research frontier on the economic and labor market consequences of recessions, in particular with respect to the intersection between human capital and digital technology. To achieve this, we formulated the following sub goals: 1. Build a multilevel database and research design that allows us to investigate human capital decisions by firms, and the labor market consequences for individuals, over the course of the recession. This goal has been accomplished, but first we faced a two year delay in getting the data from SSB, and when they did arrive there were serious mistakes in the matching that took additional months to get fixed. This meant that the time we had to work with the full dataset became limited even if our project was extended by one year. 2. Deliver high quality interdisciplinary research based on this database. We have produced research, but because of the delays decribed we have done more research using those parts of our datacollection that was not affected by the delays at SSB (e.g. survey data, accounting data, data from other recessions). In terms of volume and quality our output goals have been met. 3. Set up and execute a communication strategy to effectively disseminate our research findings to the relevant audiences.

The COVID-19 pandemic started as a medical crisis that quickly turned into a recession as governments introduced measures that locked-down large parts of the economy. Even for firms not in lockdown, a steep decline in demand forced a large number of firms to make dramatic changes to how they invest, deploy, and manage their human capital. This raises the general question of how the pandemic impacts firms’ human capital decisions, and the economic and labor market consequences this implies - both for firms and individuals. Independently of the crisis, firms were already (to varying extent) going through processes of digitalization. It seems reasonably clear that the pandemic will accelerate this digital transformation. It pushes a wide range of business activities online, some of which will lead to lasting changes in organizational- and consumer-behavior. The crisis has thus encouraged firms to implement digital technologies earlier than anticipated, and it seems to have rewarded firms that were highly digitalized before it started. We therefore believe that to understand the economic- and labor market consequences of the COVID-19 pandemic, it is important to realize that human capital decisions following the crisis and the process of digital transformation of the economy are intertwined. The key key to make significant progress on all these issues are two things. One is higher quality data. We need to be able to integrate data on characteristics of firms and industries, with data on the characteristics of individuals and government interventions in a common dataset to understand their interactions and relative effects. To better understand the dynamics of the crisis we also need real time data to observe changes as the crisis unfolds, rather than retrospective data. The other key thing needed is an interdisciplinary group of researchers who can bring a multitude of theoretical and analytical approaches to the data. Our project aims to do both.

Funding scheme:

BIA-Brukerstyrt innovasjonsarena